What Could be the Catalyst for Another March-Style Slump?

Dear Reader,

It looks like we’ve picked a lousy time to celebrate American independence from the British. Victoria’s Premier, Daniel Andrews, has placed nine public housing towers in a ‘hard lockdown’, meaning you can’t even leave your flat. The state announced 108 new COVID-19 cases on Saturday. A total of 36 suburbs are now under lockdown again, for up to four weeks this time.

Of course, Australia in general, and Victoria in particular, have absolutely nothing to do with the US’ War of Independence with the British in 1776. Except, perhaps, when it comes to ideas.

The idea of most Constitutional Republics or Constitutional Monarchies (where the Sovereign is the Head of State) is that government is limited, individual rights are enshrined by law, money is sound, and people are free (to move, to assemble, to speak, to worship their god, or petition their government when they have a grievance).

In a brand new report, market expert Vern Gowdie warns of the dangers waiting in a post-COVID-19 world. Plus, he outlines the steps you should take now to protect your wealth. Learn more.

And you thought you were free…

Ha! And you thought you were free. In the modern world, any kind of emergency — medical, financial, political — becomes an excuse to suspend Constitutional liberties and place the people in lockdown for their own safety.

Temporary measures become permanent. And before you know it, you have to seek permission from the government to do just about anything, including walking on your front door. Welcome to the age of unlimited government.

Australia, with a majority of its population living in state capitals or regional cities, has become the perfect place to practice authoritarian, technology-driven policies of social, political and financial control.

By comparison, the age of unlimited money is not so bad, even if it is a giant fraud. The combined balance sheets of the world’s major central banks are now 50% of GDP in their respective economies. Central banks in the US, Europe, Japan, and Switzerland have combined assets of $20 trillion. Their response to the C-virus pandemic has been to buy stocks and bonds to support the financial economy.

Good for them. And good for financial asset owners. The bankers have stabilised stock markets with a wall of fake money. But when money is literally no object, when you define it so a committee of bankers behind closed doors can create it at will, what do you expect? Unlimited money tends to go into asset prices first and the pockets of ordinary people later (if at all).

One thing unlimited money CAN’T do, though, is prevent a global depression. That’s precisely what the policy makers hope, of course. But the real economy responds to real prices and real incentives.

In both Australia and the US, millions of people remain out of work due to government pandemic policies. Hundreds of thousands of small businesses will go to the wall and never come back. Globally, trade will slow.

All things being equal, depressions tend to be deflationary. Trade contracts. Loans go bad and debts are defaulted upon. Businesses fail. Unemployment rises. This is the business cycle. It’s perfectly normal. The abnormal attempts to end the business cycle through monetary policy are what turns recessions into depressions.

And that’s where we are now. Australia is having its first recession in 30 years. Its last line of defence against a deeper slump is an all-out central bank money printing campaign to prop up markets. That’s exactly what you should expect. If public debt in Japan can equal 200% of GDP, and the Bank of Japan can expand its balance sheet to 100% of GDP, why not Europe? Why not the US?

We hardly know what to make of events anymore. On the one hand, we’re on the verge of an unprecedented monetary experiment. Monetary policy has become completely decoupled from previous precedents and common sense. In response to the global pandemic, the shackles are off and money creation is exploding.

Yet it hasn’t resulted in what you’d normally expect around now: surging consumer price inflation and the destruction of paper money.

Why? Because economic activity around the world has been dealt a body blow by the government response to COVID-19. Massive deflationary forces are at work in the real economy.

Which will win, then? Inflation or deflation? Fire or ice?

Our answer is ‘both’. Central bank action HAD led to inflation, but in stock prices (especially in growth/tech stocks in the US). The stock market, which normally leads the economy, is now pumping out a steady stream of bogus price signals about the health of the real economy. Investors should be aware that another 40­–50% fall in stock prices could easily happen by the end of the year (it’s justified on a valuation basis alone).

What could be the catalyst?

What could be the catalyst for another March-style slump? Take your pick! China’s new security law in Honk Kong began being enforced in the last week. It’s even more draconian and authoritarian than expected. And what China has done in Hong Kong could be the prelude for what it wants to do in Taiwan.

But even if you take geopolitical tensions in Australia’s back yard out of play, you have the US politics and the coming summer of hate. The two major political parties in the US are about to pick their candidates for November’s General Election. It will be official: Joe Biden versus Donald Trump.

It’s hard to say what will turn the election. But it’s shaping up to be a referendum on how you feel about pandemics. If you favour centralised planning, committees for public safety, big government, surveillance technology, and lockdowns, Biden is your man. If you favour bluster, incompetence, and also big government using surveillance technology to lock you down, give Trump a go.

If you choose to think for yourself, you might consider giving both a miss. Avoid getting caught up in choosing sides in a fight that’s not yours. No one is on your side but yourself, your family and the friends you choose. You’re going to need all of them in the months ahead.

Bull…bear…Republican…Democrat…Victorian…New South Welshman…they’re all just labels other people choose for you and want you to believe in. Charting your own path and having your own rebellion of one…that’s the real revolution in 2020. Happy Independence Day!


Dan Denning,
Editor, The Rum Rebellion

Dan Denning is the co-author of The Bonner-Denning Letter.

Dan was a founder of Port Phillip Publishing back in 2005, which quickly became the leading publisher of its kind for independent financial research and insights. In 2014 he left to head up Southbank Investment Research in the UK. Dan is also the author of the 2005 book, The Bull Hunter. Today, he’s based in his home state of Colorado. Each Monday in The Rum Rebellion you’ll get Dan’s unique contrarian thinking to provide insights you won’t find anywhere else.

Dan Denning’s belief in free markets, sound money, personal liberty, and small government have underpinned everything he’s done during his 23 years in the financial publishing industry.

The Rum Rebellion